Sterne Agee published a report Friday, June 13th, titled “Student Debt, an Impediment to the American Dream”. The report, authored by SA’s Chief Economist Lindsey M. Piegza, argues that unlike other types of consumer debt, student loans do not create consumption, but instead “stifle America’s youngest generations from spending, particularly on large ticket items such as home purchases”. She says that lacking the organic job and income growth most of their parents and grandparents enjoyed, younger and middle-aged Americans will struggle with unmanageable student loan debt, leaving them unable to attain the American Dream of home ownership or retirement.

Students loans are a large and rapidly growing problem

Student loan

On track to exceed $1.2 trillion by the end of 2014, student loan debt is now the second largest form of consumer debt  (mortgages at $8.2 trillion are number one). Piegza points out that student loan debt has tripled over the last eight years, and that more than 70% of graduates from American colleges and universities leave with at least a few thousand in student loans. Almost 40 million Americans are paying off (or are in forbearance or default) on a student loan. College graduates have an average of greater than $29,000 in student loans, and one in ten racks up more than $40,000 in debt.

Younger Americans can’t find jobs

Student loan participation rate

Many younger Americans are having great difficulty finding good (or any) jobs, while a growing number are just giving up and dropping out of the labor market. The U.S. Bureau of Labor Statistics reports that the labor force participation rate of 20- to 24-year-olds has dropped to the lowest level since the early 1970s. Even more concerning, the participation rate bachelor’s degree or higher holders has declined to 75%, the lowest level since 1992, when the BLS began analyzing participation by educational attainment.

Student loan delinquency rates soaring

Student loan delinquency rates

Given that they can’t find decent-paying jobs, recent graduates are increasingly having difficulty in keeping up with their student loan debt. The Federal Reserve Bank of New York just reported that the 90+ days delinquency rate on student debt is now over 10%, by far the the highest among types of credit being tracked. Current delinquency rates on autos and mortgages, for example, are just 3.3% and 3.7%, respectively.

Debt prevents major purchases

Another consideration is that student loans cannot be discharged in bankruptcy, nor do they finance personal consumption as the vast majority of the funds are disbursed directly to the school. While other forms of consumer debt typically increase consumers’ spending activities, often acts as a long-term drag on individual purchasing power. Piegza argues the net effect of burdening the younger generations with “mountains of debt” will be to significantly “delay a generation from key purchases, particularly large acquisitions such as housing”.